Home/Column/Incorporation/Is it Recommended to have a Board of Directors or Company Auditor in Japan

Author

Jun Kurozumi

International Contact Partner / USCPA (Washington)

Is it Recommended to have a Board of Directors or Company Auditor in Japan

September 9, 2019

Question:

Is it better to have a board of directors or company auditor?

Answer:

While the presence of a board of directors or company auditor isn’t a specific requirement, but there are cases where it is better to have such organs.

Explanation:

The minimum requirements include the necessary establishment of two organs: the annual general meeting, and the director(s).

From May 1, 2006 onwards, following the enforcement of the Companies Act, stock companies could be incorporated as long they had at least one shareholder and one director. The shareholder and director can be one and the same person, making it possible to incorporate a business alone.

Based on Companies Act alone, a stock company can choose to have neither a board of directors nor company auditor. Whether it would be recommended for a company to have either can vary on the status of the business.

One merit of having a board of directors is that decisions involving the company can be made faster, and this increases the company’s appeal to the public. For a stock company with several shareholders that would make it difficult to hold shareholders general meetings, having a board of directors that could meet to resolve company matters without the need for a shareholders general meeting would be especially advantageous.

As for the merits of having a company auditor, having an officer who inspects (audits) the company’s operations and/or accounts would increase its appeal to the public. Officers, etc. of companies with auditing bodies (limited to those with operational audit authority) can also be granted some level of liability exemption, provided by Article 426, paragraph (1) of the Companies Act.

Companies Act

(Provisions of Articles of Incorporation on Exemption by Directors)

Article 426　(1)　Notwithstanding the provisions of Article 424, Companies with Company Auditor(s) (limited to cases where there are two or more directors), Companies with Audit and Supervisory Committee, or Companies with Nominating Committee, etc. may provide in the articles of incorporation that, in cases where the relevant Officers, Etc. have acted in good faith and without gross negligence in performance their duties, if it is found particularly necessary taking into account the relevant circumstances including, but not limited to, the details of the facts that caused the liability and the status of execution of duties by such Officers, Etc., exemption may be given with respect to the liability under Article 423, paragraph (1) by the consent of a majority of the directors (excluding the directors subject to such liability) (or, for Companies with Board of Directors, by a resolution at the board of directors meeting) to the extent of the amount which exemption may be given pursuant to the provisions of paragraph (1) of the preceding Article.

(Continuation omitted)

Source: Japanese Law Translation Database System
https://www.japaneselawtranslation.go.jp/

Also, it not always the case that only one director is required of a company. For example, a Large Company (meaning any Stock Company with a capital of more than 500 million yen or 20 billion yen or more in liabilities) must have a company auditor (or a board of company auditors) and a financial auditor. As the required organs for each company may vary, it is necessary to take these into consideration.

On an additional note, shareholders rights may vary between companies with or without a board of directors and/or a corporate auditor(s).